“We’re gonna do things better than humans can.”
- Elwyn Berlekamp
Outraged that someone might buy Oil or an Energy stock today without a view on “supply and demand”? How dare such a hollow soul violate the management-fee-based merits of Enviro Davos Man and/or ESG? Getting mad isn’t going to change The Machine.
The aforementioned quote came from one of Jim Simons’ early math partners who helped him run Renaissance Technologies’ Medallion Fund, which returned > 66% annualized (before fees and 39% after fees) over a 30-year span from 1988 to 2018 (Wikipedia).
“It wasn’t just on campus where Simons’ ideas seemed out of touch. A golden age for traditional investing had dawned as Soros, Lynch, and Bill Gross divined the direction of investments, financial markets, and global economies.” -The Man Show Solved The Market, pg 3
Back to the Global Macro Grind…
I don’t divine markets. When we told you we were going from bearish to bullish on Oil and Energy Stocks at the beginning of October of 2019, did we say anything about supply, demand, or Davos?
Nope. But I will tell you that today’s 15-day inverse correlation between USD and Oil is -0.86. The Machine already knows that.
Our “call” was purely process-based and Quad-driven. Like telling you to buy Treasuries (across the curve), Gold, REITS (VNQ), Housing (ITB), and Utilities when the “charts looked bad” in October of 2018, there was no Old Wall Technician who liked Oil in October of 2019.
Front-running The Machine is a great way to stay ahead of Old Wall men.
If you are indeed “old”, that shouldn’t offend you… unless you are too old to learn something new, of course. At 45 years old, I’m hardly a young man on Wall Street anymore. I try to read a new book every 10 days to remind myself that I don’t know what I don’t know.
Knowing that beats thinking you know everything “fundamental” about investing, btw.
Back to why I’d buy both Oil and/or Energy Sector Style exposure (via XLE) today:
A) The US economy is in #Quad3
B) The Top 4 US Equity Sector Styles to be long of in #Quad3 are Utilities, Tech, Energy, and REITS (in that order)
C) Both Oil and Energy Stocks (XLE) are signaling immediate-term TRADE #Oversold within their Bullish TRENDs today
‘But dammit, Keith, the 50-day Moving Monkey broke and I read a bunch of long-term bearish stuff about Energy company returns on Zero Edge.’ Yep, they’re the same guys/gals who sold Oil and Energy stocks (at lower prices) at the end of OCT and NOV too.
Then, December 2019 happened.
And, to review:
A) US economic data continued to slow at a faster rate (i.e. #Quad3 took our US GDP Nowcast to 0.06% for Q419)
B) The US Dollar went straight down from it’s Global #Quad4 Cycle highs in December
C) Oil and Energy Stocks beat any major asset allocation you could have been long of vs. the crowd
Nope, nothing on Iran, WWIII, or Coronavirus happened in December either.
And I didn’t hear a peep from the fundamentalists on that Oil/Energy ramp in December either… because… consensus hates Energy as much as our process hated their MLP Long exposures before many of those Hedgeye Energy Shorts went to zero (see 2016 for details).
But I’ll hear plenty of peeps and tweets today. And I should. If fundamental supply and demand is all that one does (even though our OPEC supply cut call from our Energy Policy team is bullish for Oil), maybe they should be shorting Oil and Energy this morning?
I don’t know how they really think (I don’t run their models and haven’t back-tested their process) and, no offense, but I really don’t care.
What I care most about is:
A) What economic Quad the USA nowcasts in
B) What the Fed thinks about that economic reality and
C) What the US Dollar does, from here
On that score:
A) It’s #Quad 3 in Q1 of 2020
B) The Fed doesn’t get that yet and, as a result, isn’t nearly Dovish Enough, yet
C) If/when the Fed catches up to the Treasury market (10yr Yield down to 1.74%), I expect a big Dollar Down move
Then, let’s say that happens in the next few weeks post the “no one saw it coming” GDP report and another US #JobsSlowing report, I’d expect to sell both Oil and Energy Stocks higher than where they are today.
And then I’ll short them both again in #Quad4 (late in Q1 or early Q2?) for reasons that have nothing to do with supply and demand.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.72-1.83% (bearish)
UST 2yr Yield 1.50-1.58% (bearish)
SPX 3 (bullish)
Utilities (XLU) 64.81-68.31 (bullish)
REITS (VNQ) 91.94-96.32 (bullish)
Energy (XLE) 55.51-60.95 (bullish)
Tech (XLK) 93.50-98.18 (bullish)
VIX 11.90-13.75 (bearish)
USD 96.58-97.60 (bearish)
Oil (WTI) 55.13-59.92 (bullish)
Nat Gas 1.84-2.17 (bearish)
Gold 1 (bullish)
Copper 2.75-2.88 (neutral)
GOOGL 1 (bullish)
NFLX 319-336 (bearish)
Bitcoin 7 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
